Stagflation occurs when economic output stagnates but inflation keeps rising. It generally leads to unemployment and poor consumer demand.
According to the RBI survey, household’s one year ahead inflation expectations have climbed to 10.5 per cent in July. Such a high level was last seen in 2015-2016, Nomura India said.
On Thursday, RBI did not provide a growth forecast, but reiterated that real GDP growth is expected to be negative.
RBI Governor Shaktikanta Das said economic activity was recovering from weak levels seen in April and May, but warned that a resurgence in infection cases may result in activity leveling off.
Das said that even near-term inflation appeared high, the normal monsoon projection and good momentum on rural activity are mitigating factors.
“While stagflation risks may dominate in the short term, they are unlikely to be sustained. The recent flattening in the mobility curve suggests that sequential growth is stagnating below normal after the initial business resumption, which should have a salutary effect on underlying inflation,” said Nomura India.
Economic indicators have shown signs of improvement post the partial reopening, data for the week ending July 20 suggested. Data showed energy consumption slackened in July, only to see a sharp uptick on July 27 and July 28, marking highest growth since pandemic.
“E-way bill generation growth was robust at 39 per cent week-on week. CMIE India unemployment rate worsened for the second consecutive week led by rural, but urban retained improvement. Besides, bank credit inched up in July-beginning,” said Phillip Capital
Nomura India projects the growth slowdown to be more durable, but says the inflation concerns are likely to be transitory. The brokerage expects RBI to cut repo rate by 50 basis points in the March quarter.